Tilburg Law and Economics Center

TILEC supports and stimulates academic research on the governance of economic activity. It fosters academically path breaking and practically relevant research and aims to be a leading center worldwide.

TILEC Work in Progress: Paul Pudschedl

Captive insurance is an increasingly
popular risk management tool used by firms of all sizes and across all
industries. The literature on hedging has shown that because of market
imperfections, hedging activities by firms can have a positive financial
impact. Yet despite the enormous theoretical and empirical literature on firm
hedging, the extent to which captive insurance lowers the impact of risk on the
financial performance of the firm is unknown. Managers often claim that captive
insurance usage will yield similar benefits as hedging. Using a panel data set
consisting of annual financial data of non-financial corporations, I document
the usage of captive insurance structures by firms and the impact on firm
financials. Consistent with my hypotheses, I find strong evidence of a positive
relationship between firm usage of captive insurance structures and lower
borrowing costs and decreased marginal tax rates as well as with higher
dividend payouts and more spending on intangible asset development. The results
suggest that captive insurance yields similar benefits to firms as hedging.